August 22, 2000

On August 1, 2000, the US Department of Agriculture announced a new program in an effort to help reduce the US sugar surplus and prevent loan forfeitures. The beet and cane sugar Payment-In-Kind (PIK) program offers growers the choice of diverting a portion of their crop out of production in exchange for sugar held by the US government's Commodity Credit Corporation (CCC). The CCC has announced a 2-week sign-up period for the Program. The sign-up runs from Monday, August 21, 2000, through Friday, September 1, 2000. Farmers are limited to $20,000 in PIK payments.

The US Sugar Program, which is designed to keep US sugar prices above the world price, has led to a record sugar surplus making it difficult to maintain the high US target price. The surplus is the result of increasing domestic production. In the past, the US has been able to reduce imports to prop up prices but this is becoming increasingly difficult. WTO imports have reached a minimum and Mexico's access is set to increase significantly this fall under the NAFTA (see related article below). By reducing the upcoming harvest, it is hoped that the PIK Program will help reduce government sugar inventory carrying costs and the reduce the potential for loan forfeitures under the US Sugar Program.

The US government is currently holding 174,000 tons of refined sugar in inventory. Because US market prices are at an 18-year low and approximately 4 cents/lb below the price needed to encourage CCC sugar loan repayments, a significant amount of the 640,000 tons of refined beet sugar pledged as collateral under the Sugar Program for outstanding non-recourse loans is expected to be forfeited during the remainder of FY 2000. The PIK program is generally viewed as a short term solution and inadequate to address the fundamental supply/demand imbalance in the US market.

Mexico Seeks NAFTA Panel in Sweeteners Dispute with US

On August 17, Mexico's Secretary of Commerce and Industrial Promotion (SECOFI), Herminio Blanco, officially requested a NAFTA Panel to resolve the dispute over Mexico's access to the US sugar market. Part of the work of the panel will be to rule on the role of high fructose corn syrup (HFCS) in the formula used to calculate Mexico's surplus sugar production under the NAFTA.

The Mexico-US dispute centres on the validity of a side letter to the NAFTA. According to Mexico, the NAFTA entitles Mexico to export its entire "surplus" sugar production to the US, starting October 2000. The US would like to limit Mexico's access to the surplus sugar production minus Mexico's HFCS consumption. This US interpretation of Mexico's surplus is based on a side letter to the NAFTA although it appears that the side letter was never signed by Mexico. As a result, Mexico is claiming the NAFTA text determines its access. The difference is significant. According to some reports, Mexico's interpretation would allow shipments in the range of 500,000 - 600,000 tonnes annually beginning October 1, while the US definition would limit access to the 100,000 to 150,000 tonne range (note: Canada's access to the US is restricted to 10,300 tonnes).

The American Sugar Alliance (ASA) issued a statement in response to the Mexican announcement. It states that it was "shocked and dismayed" at the Mexican action and suggests that Mexico is questioning the validity of the NAFTA rather than the validity of the side letter. The ASA statement notes that the US government consistently told the US industry and Congress that the NAFTA side letter was valid and that the NAFTA would not have been approved by Congress without it. The US industry generally fears that an increase in imports from Mexico will have a serious impact on its already oversupplied sugar market. This escalation in the dispute only heightens uncertainty in the US sugar market.